By STAN CHOE – AP Business Writer
NEW YORK (AP) — Worries rocking Wall Street about interest rates, inflation and now Ukraine have sent the S&P 500 index — the most-watched measure of the U.S. stock market — plummeting by more than 10% compared to its record.
It’s a big enough drop for Wall Street to give it a name: a “correction”. Such declines happen regularly and market professionals tend to view them as potentially healthy setbacks that can eliminate unwarranted market exuberance or excessive risk taking.
But they are scary right now, especially for each new generation of investors entering the market at a time when it looks like stocks are only going up. The S&P 500 more than doubled between late March 2020 and early January, when it reached its last all-time high.
Taking some moss out of the market is one thing. The biggest fear, which always accompanies a correction, is that a correction could herald a “bear market”, i.e. what Wall Street calls a decline of at least 20%.
Here’s a look at what history shows from past corrections and what market watchers expect in the future.
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WHAT’S BEHIND THIS CORRECTION?
Much of this decline is the result of fears of an abrupt shift to higher interest rates. After years of keeping interest rates very low, the Federal Reserve should start raising short-term rates to help contain the high inflation plaguing the global economy.
Higher rates can limit prices by slowing the economy, but they can cause a recession if they get too high. They are also often used to suck money out of the riskiest areas of the market, including stocks. When interest rates are higher and safe investments like bonds pay more interest, investors are less willing to pay high prices for more speculative games.
The Fed bought trillions of dollars in bonds during the pandemic to keep long-term rates low, an action Wall Street calls “printing money.” Investors expect the Fed to reverse this process, which would act much like additional rate hikes.
More recently, concerns tensions with Russia over Ukraine accelerated the fall of the market. Beyond the human toll, conflict in the region could drive up the prices of oil and other energy commodities and further fuel inflation.
HOW OFTEN DO CORRECTIONS OCCUR?
Every two years, on average. Even during the historic nearly 11-year bull run for US stocks from March 2009 to February 2020, the S&P 500 stumbled through five corrections, according to the CFRA. Worries about everything from interest rates to trade wars to a European debt crisis drove the declines.
In 2020, a correction turned into a bear market after the global economy came to a sudden halt due to the pandemic. This sent the S&P 500 on a dizzying fall of nearly 34% in about a month.
It’s the 24th time in the past 50 years that the S&P 500 has fallen by at least 10%, including both bear markets and milder corrections.
HOW QUICKLY DO THEY USUALLY HAPPEN?
Not so fast. Looking only at corrections since World War II that did not end up becoming bear markets, it took an average of 76 days for the S&P 500 to lose 10% from a recent high, according to the CFRA. This time it took 50 days.
Of course, things could be worse. In February 2020, the S&P 500 fell more than 10% from a record high in just over a week. It ended up being the start of the fastest bear market on record, as well as the shortest.
WHAT USUALLY HAPPENS AFTER A FALL?
Looking only at corrections since 1946 that managed to recover before turning into a bear market, the S&P 500 took an average of 135 days to bottom and lost an average of 14% along the way, according to the CFRA. . The index took an average of 116 days to recover its losses.
For dips that become bear markets, the damage is much worse. Going back to 1929, the average bear market took an average of nearly 20 months to bottom and caused the S&P 500 to lose about 39%, according to the S&P Dow Jones Indices.
HOW MUCH CAN A BEAR MARKET BE?
On paper, an investor can lose most of their money. From late 1929 to mid-1932, the stock market fell just over 86%, for example.
A bear market can also seem endless: one lasted more than five years, from 1937 to 1942, where US stocks lost 60%, according to the S&P Dow Jones indices.
In Japan, the Nikkei 225 index is still trying to regain the peak it reached at the end of 1989. It remains around 30% below this level.
The Japanese example, however, is an outlier. In almost all cases, investors would have recouped all of their losses from a bear market for US stocks if they had simply held on and not sold. This includes the dot-com bust of 2000, the financial crisis of 2008, and the coronavirus meltdown of 2020.
HAS INCREASED CONCERNS CAUSED OTHER CORRECTIONS?
If the Fed raises short-term rates next month, which investors take for granted, it would be the first such hike since 2018.
At that time, the S&P 500 fell nearly 20% as the Fed feared it was too aggressive in raising rates and shrinking its balance sheet. The index only avoided a full-fledged bear market after the Fed took a hard turn to say it would be “patient” in its policies. It has yet to raise rates.
SHOULD WE EXPECT THE SAME THING TO HAPPEN?
Nobody knows. Some Wall Street investors say they expect the Fed to ease again before the stock market falls too sharply. But the Fed is facing much higher inflation this time around than at the end of 2018 and the beginning of 2019. The consumer price index jumped 7.5% in January compared to the previous year, its highest rate in four decades.
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